It is said that the risk allocation mechanism upon drop of revenue in Investment Law under PPP 2020 (Hereinafter “PPP2020”) is a reckless, or even revolutional move in investment policy under public – private partnership (Hereinafter “PPP”) in Vietnam. This, however, is a neccessity in contractual relationship. PPP2020 is a “breakthrough” or just a “matter of common sense”? Should Vietnam come up with such a matter of common sense in this age when we are developing a methodical and attractive policy for PPP partnership? Let us discuss in our below article.
PPP – origin and characteristics
PPP was first known in France in 1438 when Luis de Bernam, who is a French nobleman, was granted a river concession to charge the fees for goods transported on the Rhine from France Government. Thereafter, France Government issue public works concession (concession de travaux publics) policy. With the concession contracts, private capital was widely used in the period from the 17th to 18th centuries to the end of 19th century in both public service and infrastructure development in Euro, America, China, Japan, and nowadays, all over the world[1]. According to ADB, PPP has been known in Vietnam since 1990 through BOT Bridge Co May, BOT Phu My Bridge, Phu My Power Plant[2].
PPP, ever since its birth, has been referred to as a constractual mechanism between private and public sector. In PPP, each party shall contribute its prominent capacity, assets and/or financial resource to “coordinate” the project. Since early days, Vietnamese legal regulations has recognized and affirmed the “contractuality” of this investment cooperation method. Contractuality in PPP creates equal rights between parties – a rare characteristic in the relationship between the public and private sectors that is managed and coordinated by the interests of the country and the community . It is this characteristic that gives rise to a clear obligation to take responsibility and allocate risks among PPP partners.
Meanwhile, the long term, large scale and significant impacts lead to basic risks for PPP such as revenue risk, policy risk, community risk, risk of market opinion changes, exchange rate risk… Besides, each PPP project has different characteristics, so the risk system for each specific project is unique and always different. The problem of risk allocation has been mentioned by many legal systems with different criteria, identification and governance models, but in general, when it comes to risk allocation in PPP, it will always includes the following activities: risk identification, division of risks, building risk control models, collecting and assessing the impact of risks through a system of predefined reports and modifying models and risk control over the life of a PPP project. In some legal systems in common economic zones with Vietnam such as Thailand, Korea, and Singapore, investment guarantees are understood as the responsibility of the state to investors, hence, risk allocation requirements in PPP for similar factors or almost all investment guarantees are placed in the public sector at a higher, more specific and transparent threshold.
Regulations on risk allocation in PPP in PPP2020
From the point of view of a private partner in PPP, it can be seen that the regulations related to risk allocation at PPP2020 are not so “attractive”.
The first problem is the provision on the risk allocation mechanism when revenue drops in Article 82 – a “breakthrough” provision but a lack of mechanism.
Article 82 only covers the rise/drop of revenue while the ultimate goal of any investment is “profit”. It is not difficult to give examples of investments with increased revenue but declining profits even not reaching the investment level expected, this provision has not touched the nature of the risk of “decrease in profits”. Long-term is a characteristic feature of PPP projects, this feature makes PPP’s revenue continuously affected and prolonged according to socio-economic reality at each stage, so if we only “cut” out a stage in order review the “increased/decreased revenue” and apply the risk allocation mechanism as the law, in general, investors in the private sector still suffer losses because they invest capital and main resources for project development. In addition, the revenue reduction allocation mechanism is provided in the content of project selection documents, preparation and appraisal of pre-feasibility study report (Point e, Clause 3, Article 14 and Point c and point dd Clause 2 Article 15 in PPP2002) and in the content of the decision on investment policy for a PPP project (Point e, Clause 1, Article 17), however, in the appraisal of the feasibility report (Clause 2, Article 20), this issue is not mentioned although it is clear that this content needs to be considered and carefully reviewed. This shows the inadequacy between the law of the risk allocation mechanism and the creation of the operating mechanism, governance of that mechanism.
The next problem at PPP2020 on risk allocation is that PPP2002 has and mentioned public sector responsibility but is “half-hearted”.
Under Point a, Clause 1, Article 50 PPP2020, changes in planning, policies and related laws have a serious impact on the technical and financial plans of the project, prices, fees, charges for public products and services provided by PPP project enterprises are the basis for the parties to modify the PPP project contract. Considering in PPP, issues of planning, policy or law are all established elements from the public sector, so the public sector has advantages and greater autonomy than the private sector in terms of factors. this. Some countries (such as Korea, Thailand, Singapore), instead of choosing to renegotiate the contract, have set a mechanism forcing the public sector to take this risk from the beginning. This open-minded legislative stance is much closer to the “take advantage of” characteristics of the parties in the PPP and above all a commitment from the public sector to a mechanism to stabilize policies and investment environment of a country for long-term projects like PPP. A regulation like PPP2020 can implicitly lead to the implication that private partners are being asked to allocate with risks that should belong to the public sector, whether Vietnam should take a more open perspective in this matter?
Another half-hearted provision is Article 56 on construction site preparation and the provision in Article 80 on general guarantees, PPP2020 gives the responsibility of the public sector in ensuring investment and securing construction ground for the project, however, even in the content of these regulations, applicable conditions and detailed operation are being referred to specialized laws. Meanwhile, it is clear that in specialized law to enjoy preferential policies and/or to be guaranteed any project implementation conditions, the judicial investor meets a list of specific conditions. Thus, it can be seen that PPP2020 has a provision for public sector responsibility in PPP projects, but “reaches the target”, the responsibility still belongs to the private sector.
The final provision review is Clause 3, Article 58 PPP2020 on selection of contractors bidding for execution of PPP projects are still “open” as follows: “PPP project enterprises take responsibility for fulfillment of quality and progress requirements of the package” . This regulation has two approaches, firstly, the project enterprises will select the contractor according to the bidding principles and take responsibility for the contractor’s activities related to the quality and progress of project; and the second approach is that project enterprises are still responsible for the quality and progress of project implementation in any case. This open-ended rule with different understandings leads to a lot of consequences for the project enterprises – the legal presence of the private sector in PPP and seems to be “gathered” most of the related progress and quality responsibilities for the private sector.
In fact, PPP2020 has already been enacted and is about to come into effect, although risk allocation regulations are clearly unattractive. However, it is fair to argue that it is not really easy for any legislator to balance the interests between the private sector and the public sector – also known as the national interests. Therefore, if considering PPP2020 as the foundation, lawmakers still have time to make appropriate adjustments to build an attractive investment policy.
Recommendations
With the current starting point and practical experience, when revising PPP2020 or enacting a new PPP law, Vietnam can consider adding the content of risk assessment, allocation solutions, risks controlling into pre-feasibility study reports, and feasibility study reports are required and are the basis for PPP contract negotiation and private party selection.
In addition, considering the provisions of PPP2020 itself and the legislative mechanism in the Law on Promulgation of Legal Documents, it is clear that lawmakers still have the opportunity and time to consider creating such attractive risk allocation regulations to the private sector, especially foreign investors (potential source of capital but difficult to require equality and transparency criteria in investment) by supplementing the detailed provisions in sub-law documents on the foundation of PPP2020, as follows:
- Currently, Clause 5, Article 6 PPP2020 is assigned to the Government to provide more detailed regulations on the activities of the appraisal council, whereby the Government can introduce regulations on the development of the council’s appraisal items and mechanisms for allocation, managing, monitoring, reporting and responding to risks with each type of PPP contract.
- In addition, the Government has also been assigned the right to prescribe model contracts for all types of PPP contracts (Clause 3, Article 47 PPP2020), whereby the forms can supplement principles about mandatory risks that must be allocated from the public sector in each type of PPP contract on a consistent basis with the orientation of the regulations in PPP2020
Conclusion
If not too strict, Article 82 in PPP2020, although being such a “delicate” sign, is a light to guide the long journey of bringing PPP policies in Vietnam closer to the nature of a proper equality relationship. The risk allocation mechanism in PPP2020 still has many points to discuss; however, it is clearly the foundation for building confidence and expectations of the private sector about favorable and attractive policies for public – private partnership. With practical experiences based on international learning, it will not be too far for Vietnam to constantly build up PPP policies in the orientation of increasing the attractiveness of the private sector as well as still ensuring the fundamental public sector interests.
Lawyer Nguyen Thi Hoa – Penfield Law Company Limited
[1] Đề tài “Policies To Attract Foreign Direct Investment In Private-Public Partnership Projects In Vietnam. Experiences From Some Countries In The World And Lessons For Vietnam”, Master Thesis, Nguyễn Thị Hoa, FTU 2017.
[2] “Public–Private Partnership Operational Plan 2012–2020 (Realizing the Vision for Strategy 2020: The Transformational Role of Public–Private Partnerships in Asian Development Bank Operations)”, Asian Development Bank, 2012